Any questions: Financial Planning - August 2011

Sunday, July 31, 2011

Investments going north while I go south

I have just sold my UK house and am in the process of emigrating to New Zealand. In three or four years I plan to use part of this money to buy a house over there, but in the short term I will be staying with family. What is the best way for me to invest this money until I decide to buy?

The best type of investment will depend upon a number of different factors including how much risk you want to take, how accessible you need the money to be and when you anticipate you will cash in. Conventional wisdom says that an investment of less than five years should be held in cash, since this is too short a period for investments which will fall as well as rise e.g. the stock market.

The downside of cash deposits is that over the longer term the interest rate is unlikely to keep pace with inflation and therefore the real value, the buying power, of your cash is likely to fall. This may be an acceptable price to pay for security.

You also have to consider the currency conversion issues. Sterling is weak at the moment and there seems little prospect of short term strengthening against the New Zealand Dollar (NZD) unless there is a sharp correction in commodity prices. The NZD has continued to climb against Sterling despite the International Monetary Fund commenting in May that the NZD could be as much as 20 per cent overvalued against its major counterparts. This means that if you make your conversion now, the exchange rate will not be in your favour; you will get fewer NZDs for your Sterling. It is difficult to know whether this will get worse before it gets better, when or if it will improve.

You could hold back and wait for Sterling to strengthen before making the exchange, or perhaps only exchange what you need now. Either way you should use a currency broker rather than a high street bank as you may save up to three per cent on each transaction by doing so.

If you opt to wait, make use of a Cash ISA while you are still a UK resident for tax purposes, and hold the remainder in high interest internet-based accounts which you can manage from overseas. Fixed term accounts will pay higher rates of return, however be careful not to tie up money for too long in case you decide to buy sooner rather than later.

Maximising your pension provision

What happens to my pensions when I move abroad?

Most people will have built up some entitlement to State Pensions while they are working in the UK. This pension will be preserved until your retirement date and then paid to you abroad. Before you move, you should request a pension forecast (www.direct.gov.uk) and advise both the local Jobcentre Plus and HMRC Residency, informing them of your new address. If you haven't reached retirement age yet, you may have the option to continue to pay voluntary national insurance contributions from abroad. This may help with your entitlements and is worth exploring.

If you have other company or private pensions, you normally cannot continue to pay into these once you have become non-resident. You have a couple of different options:

1 Do nothing and draw your pensions from the respective schemes at retirement.
2 Consolidate your pensions into one UK pension for ease of management abroad and then draw your pension at retirement.
3 Transfer your pensions to an overseas pension or QROPS (Qualifying Recognised Overseas Pension Scheme).

If you have been a member of a final salary pension scheme (also known as defined benefit) the pension paid at retirement will depend upon the length of time you worked for the employer and your earnings. In most cases these types of scheme are best left until retirement.

Almost all other pension schemes are collectively known as "money purchase" where the size of the pension you will receive at retirement will depend upon how much you pay in, how long you invest for and the investment performance. There is certainly a good argument to consolidate these types of pension into one to make them easier to manage abroad.

An on-line low cost SIPP (self-invested personal pension) is worth investigating. Before transferring any pension it is important to check there are no penalties, loss of guarantees or other costs involved. If in doubt take advice from a pension transfer specialist.

It is important to notify your pension companies with your change of address.